The Cost of International Trade – by Richard Pomfret and Patricia Sourdin

Trade costs have been the intense focus of international economics for the last two decades. Richard Pomfret and Patricia Sourdin offer an accessible summary of what is known so far.

Although traditional tariff and non-tariff barriers to trade have been reduced, international trade continues to involve higher costs in money and time than domestic trade.  These include not only transport costs, which are determined by distance and commodity characteristics, but also at-the-border and behind-the-border costs that can be reduced by appropriate policies.  Research on trade costs has flourished since the turn of the century, and this book takes stock of our increased knowledge of the nature and magnitude of trade costs, and of why they remain high.

The policy counterpart is trade facilitation.  Trade liberalization has gone through several phases since the General Agreement on Tariffs and Trade (GATT) was signed in 1947.  The first task was to reduce tariffs and reach a disarmament agreement on other antitrade practices (such as customs evaluation procedures) that had flourished during the 1930s.  As these barriers fell, non-tariff barriers to trade such as technical or safety standards and orderly marketing agreements were addressed in the 1980s and the results of these negotiations were reflected in establishment of the World Trade Organization in 1995.  In a process often likened to draining a swamp, as the more obvious trade barriers were removed the messy stuff at the bottom of the swamp was revealed. Trade facilitation is the process of reducing the residual trade costs in order to increase the gains from international trade.

Trade policy does not exist in a vacuum.  The trade liberalization of the second half of the twentieth century, interacting with major technological change such as containerization and jet aircraft, was associated with rapid growth in international trade.  This has been associated with ever-finer division of labour, as components are shipped across borders and tasks are located in different counties.  These global and regional value chains, which had become increasingly apparent by the 1990s, added to the pressure to reduce trade costs.  If a country was to participate in value chains, then crossing its borders should be as cheap and easy as possible.  Countries which failed to facilitate trade would be left outside the process and left behind in the race for economic growth.

Trade costs can be reduced unilaterally, regionally or multilaterally.  Achieving global agreement has been difficult, despite the inclusion of trade costs in the Doha Development Round of multilateral trade negotiations.  Much progress has been achieved by national measures, and the results are highlighted in our book using detailed data from the USA, Brazil and Australia (the three largest countries for which the appropriate data are available) since 1990.  There has also been substantial progress in regional agreements, most obviously in those European Union members which participate in Schengenland and use a common currency.

Our book highlights the case of Southeast Asia where some, but not all, ASEAN members have adopted common policies, such as the ASEAN Single Window at border crossing points, to bring their trade costs down to the regional benchmark (Singapore).  It is no coincidence that the countries succeeding in this effort (Malaysia, Thailand, Indonesia and to a lesser extent Philippines and Vietnam) are major players in the regional value chains commonly referred to as Factory Asia.  It is also little surprise that ASEAN and China in 2004 signed a free trade agreement among whose major purposes are to facilitate trade for companies participating in value chains that end up with final assembly in China.

The book provides a comprehensive treatment of the costs of trading across borders and of trade facilitation policies.  Starting from discussion of alternative definitions and measurement approaches, the book reviews the existing literature including our own research using the comprehensive cif/fob gap measure [possible links below].  In this area, there is no perfect measure and it is important to recognize the strengths and weaknesses of commonly cited approaches such as the World Bank’s Doing Business indicators and quantitative estimates based on the gravity model.  Estimates of the magnitude of trade costs are important as guides to policy-makers on where to focus their attention.

Quantification is also important as the basis for evidence-based conclusions about why trade costs vary across countries and across sectors.  Some of these conclusions, e.g. about distance and weight/value ratios, are obvious, but others, e.g. about the role of institutions, are more difficult to pin down.  We review the evidence on logistics and trade costs and on the role of intermediaries in reducing (or perhaps adding to) trade costs; one aspect of the latter was highlighted by the financial crises of 2007-8, when there was a debate over the role of trade finance.  Other topics that are relevant, but harder to analyse, include the relationship between corruption and trade costs and the trade-off between security measures and trade facilitation.

Today trade facilitation is the front-line of trade policy debates.  Understanding the nature and tractability of trade costs is important if the process of increased international division of labour is to continue.  However, the analysis and policy implications are, by the nature of the topic, more complex than for traditional trade barriers such as tariffs or quotas.  Moreover, many behind-the-border trade costs involve genuine concerns about security (whether from terrorists or fruit flies) and other trade-offs that belong in national political debates (exemplified by EU members’ divisions over immigration, the euro and other trade-cost-related common policies).  Such debates should be underpinned with as firmly based as possible understanding of the nature, level and consequences of trade costs.

Richard Pomfret is Professor of Economics at Adelaide University.  Before moving to Adelaide in 1992, he was Professor of Economics at the Johns Hopkins University School of Advanced International Studies in Washington DC, Bologna (Italy) and Nanjing (China).  He previously worked at Concordia University in Montréal and the Institut für Weltwirtschaft at the University of Kiel in Germany.  In 1993 he was seconded to the United Nations for a year, acting as adviser on macroeconomic policy to the Asian republics of the former Soviet Union.  He has also acted as a consultant to the World Bank, UNDP, OECD and Asian Development Bank.

Patricia Sourdin is Adjunct Professor of International Economics at the Johns Hopkins University Bologna Center in Italy and Research associate at the School of Economics, University of Adelaide. She has also worked as Consultant to the World Bank, UNDP, OECD and ERIA, and as adjunct lecturer Sciences-Po in Paris.  Her current research and consulting at the OECD is on trade, transport costs and trade finance.

Trade Facilitation Defining, measuring, explaining and reducing the cost of international trade

For more of information visit:

Why do Trade Costs Vary?” Review of World Economics (Weltwirtschaftliches Archiv) 146(4), December 2010, 709 -30.

“Trade Facilitation and the Measurement of Trade Costs”, Journal of International Commerce, Economics and Policy 1(1), April 2010, 145 -63.

“Have Asian Trade Agreements reduced Trade Costs?” Journal of Asian Economics 20(3), May 2009, 255-68.

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  1. Elgarblog highlights of 2013 | ELGARBLOG - January 3, 2014

    […] The Cost of International Trade – by Richard Pomfret and Patricia Sourdin […]

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